Just 10 years ago, many consumers thought their only choice was to buy a vehicle. Today, according to one prominent industry survey, almost a third of all new cars are leased. The Saturday Early Show's personal finance adviser, Ray Martin, explains how to decide if car leasing is a good idea for you.
The concept of leasing is fairly simple, yet many automotive consumers don't understand it and are skeptical, even afraid of it. As with any business transaction, the key to success lies in knowing how the auto leasing business works.
With leasing, you only pay for the amount that the vehicle depreciates. For example, if you lease a car that costs $20,000 that will be worth $13,000 after 24 months, you only pay for the $7,000 difference, plus interest.
And you have the option of putting your monthly payment savings into more productive investments such as mutual funds or stocks that have the possibility of increasing in value.
Benefits of Leasing
- Less Cash Upfront: Most leases require little or no down payment, which makes getting into a new car more affordable and frees up your cash for other things.
- Lower Monthly Payments: Because you're only paying for the portion of the car or truck that you actually use, your monthly payments are 30 percent to 60 percent lower than for a purchase loan of the same term.
- Lower Tax Bite: In most states, you only pay sales tax on your monthly lease payments, instead of on the entire value of the vehicle.
- More Car, More Often: Since your monthly payments are lower, you'll be able to get more car for your money and drive a brand new car every two to four years, depending on the length of your leases.
- Fewer Maintenance Headaches: Many people lease for a term that coincides with the length of the manufacturer's warranty. If something major goes wrong with the car, it's always covered.
- No Used-Car Hassles: With leasing, the headaches of selling a used car are eliminated. When your lease ends, you can simply turn it back to the leasing company and walk away, unless you decide to buy or trade it.
The Drawbacks of Leasing
- Buying Is Cheaper Over Time: Over the long term, the total cost of leasing is almost always more than the cost of buying.
If a buyer keeps a car after paying off a loan and drives it for many more years, the cost is spread over a longer period of time. In contrast, the cost of leasing five different cars on two-year leases over a period of 10 years is greater than the cost of buying one car and driving it for 10 years.
- Limits on Mileage: Typically, lease contracts limit the number of miles you can drive to between 12,000 and 15,000 miles per year. If you exceed this limit, you're slapped with excess mileage charges at the end of the ease.
- Upkeep: Leasing companies require that you return their cars at the end of the lease with no more than normal wear and tear. Otherwise, you'll pay for the damages.
You are responsible for insurance, upkeep and regular maintenance just as with a purchased car. Some people mistakenly believe the leasing company is responsible.
- No Customizing: A leased car doesn't belong to you; it belongs to the leasing company. Therefore, you cannot make modifications, including repainting. If you do, you'll likely be charged for the cost of repairs to undo them.
- Locked Into a Lease: Lease contracts are purposely written to discourage, even prevent, early termination. To do so usually means you'll pay a termination penalty.
As attractive as it may be, leasing may not fit everybody's needs and lifestyle. Furthermore, leases can be somewhat more complicated than new-car purchase loans and require greater care and preparation on the part of the consumer in order to get a fair deal.